The Jobra project. Professor Mohammad Yunus as a faculty member of the Department of Economics, University of Chittagong conducted a research in 1976 to address the issue of acute rural poverty. He found that the poor families depend mostly on agriculture and some very small scale ‘business’ activities (‘tuktak kaz’). What was most striking that the poor women and men had skills of producing many marketable products the main bottleneck was capital. It was also evident that the poor women and men did not have any access to formal financial institutions. During his research work he found whereas the poor needed the money most, had skills to produce various marketable items, and faced the trauma of poverty which was especially extreme as Bangladesh suffered famine in 1974-75 but could not utilize their skills to earn a living simply because they did not have access to capital. The trauma of poverty was acute for women as they had to face hungry faces of children. Professor Yunus provided very small loans to the poor women on the conditions that they would form groups, investment the loans in income generating activities, repay the loans in small weekly installments and in case of default by any ‘member’, other members would repay the loan. The project was expanded by loans Janata Bank in Chittagong, and later in Tangail and Patuakhali districts as a project of the Bangladesh Bank where actual loans were disbursed by Bangladesh Krishi Bank (BKB) and Janata Bank. After initial success in several districts, the experimental project was converted into a specialized bank called Grameen Bank owned jointly by the members/borrowers and the government, under the Grameen Bank Ordinance 1983. The Bank started as project in 1976 and became a formal independent financial institute in 1983. Detail story of background and formation of Grameen Bank is available in ‘Give Us Credit’ by Alex Counts (Counts, 1996).
Expansion of Grameen Bank. Although the practice of borrowing small amount of money for investment and consumption purposes has been common in Bangladesh but the modern organized, systematic, group-based and institutionalized microcredit operation is a Bangladeshi innovation pioneered by the Grameen Bank and replicated all over the world with local modifications and adaptations. The program has enjoyed explosive growth (as of December 2013 Grameen Bank has 8.54 million members with Taka 84,385 million as outstanding loan) in Bangladesh and elsewhere and given hope to millions of poor women and men to generate income to rid of poverty. The microcredit management system has solved structural problems of targeting and delivering financial services to millions of poor people.
What we have seen in all cases mentioned earlier, that is, informal loan, commercial banks (government), agricultural development banks and cooperative societies that none was designed to provide financial services to the poor, and policies, practices and human resources of these organizations either consciously or not were anti-poor. The Grameen Bank broke the barriers by developing a different kind of organization for the poor and to serve the poor with financial services. The story of Grameen is pretty known now in Bangladesh and elsewhere but is briefly presented here for understanding the basics of Grameen model and changes introduced over the years within the microfinance management system.
The Grameen approach has broken all barriers for reaching the poor with credit by introducing the following critical steps:
1.Target the poor people, mainly women who bear the burden of poverty. This has been made operational by accepting members/clients who own less than 0.5 acre of land (functionally landless). By targeting exclusively the poor the approach ensures services for the poor and eliminates possibility of enlisting rich people taking advantages of the service;
2.Accept primarily women as clients who repay loans on time, invest monies for productive purposes and spend income to improve the quality life of family members; the process empowers them (women) as well;
3.Groups of 5 persons are formed and 30-50 members form a Kendra/centre, which is the organizational structure in a para/village where bank staff visits to make transactions;
4.Loans are collateral free; but to ensure repayment poor women are organized into groups to take responsibility of repayment (over the years it has been found that group responsibility has eroded considerably but still poor people repay more or less regularly);
5.Loans are small that is manageable by the poor and repayment are also small collected in weekly installments;
6.Instead of coming to the bank the approach takes financial service at the door of the poor; Bank’s staff members collect, supervise and take care of all management tasks similar to any commercial bank.
7.Procedures for loan applications and other administrative steps have been simplified to suit the poor.
8.All financial transactions are made in public to eliminate any possibility of corruption.
9.Experience shows that loan money is normally invested in commonly available activities such as livestock rearing, trading, agriculture production and small processing operations.
The success of Grameen model led to widespread replication and adaptation in Bangladesh and abroad by a range of institutions: non-government organizations, Bangladesh government agencies, government and private banks, cooperative societies etc. But the main breakthrough was in the mind of set of bankers and other people that the poor are bankable and they utilize loan and repay on time, lot better than commercial banks’ wealthy borrowers. The Grameen experience by 1983 had proven that with right kind of savings and loan products, policies and management system and human resources, i.e., an appropriate institution with a mission to serve the poor could not only reach them but also make a viable financial institution. The simplicity of methodology developed by the Grameen Bank has inspired many non-governmental organizations to swiftly replicate the model and offer similar financial services to the poor. The main incentives for NGOs which were normally involved in many social programs such as education, health, relief and rehabilitation to move quickly into microcredit were demand from the members, opportunity to become self-reliant (income covers expenses), and creating sustainable permanent institutions, and decent career for their staff members. The variations were in interest rate, savings and loan ceiling, size of groups etc. not much on the fundamental structure of the model.
The microcredit program in Bangladesh rightly began by targeting the rural poor, especially women, as a development intervention strategy. Microcredit serves not only to meet financial needs but also contributes to other social and institutional development issues such as women’s empowerment, bringing the rural poor into an institutional service network, and reducing the dependency on informal money lenders. The management system of microfinance programs has evolved over time but commonly have the following features:
Women are the main recipients of microfinance services though many MFIs now have male members/clients;
Group-based lending methodology is the main system of delivery of microfinance services, although commercial banks and a number of MFIs offer loans to individual clients. In early 1980s, especially in Grameen Bank, groups not only meant a collection of members for administrative purposes but also meant group liability. In case of loan default by a member, the group would take responsibility for the repayment of the defaulted loan. But now the group-based system provides just a low-cost management structure, without any responsibility of repayment; that is the responsibility of the individual borrower. However, groups do serve another practical purpose, as a filter for screening individuals for membership;
The microfinance sector in Bangladesh is now dominated by NGOs offering microfinance services, collectively known as NGO-MFIs, which offer financial services as ‘private not-for-profit businesses’ but strive to achieve institutional and financial viability as soon as possible;
MFIs are diversifying into other target segments, including near-poor groups, by developing new financial products along with the traditional management system. This diversification strategy is not only helping portfolio growth and outreach but also transforming NGO-MFIs as permanent financial service providers for both the poor and the near-poor, amongst both the rural and urban populations. NGO-MFIs have now become a new class of financial institution in Bangladesh financial markets.
Some other variations are also visible today as summarized below:
Group formation: The size may vary between 20 to 50 persons. MFIs do not strictly follow 5-member group structure of Grameen, instead they form one larger group called samity with women/men from the same neighborhood.
Savings policies: Amount of savings may vary among members as well as organizations. Normally MFIs would lend only after deposit of several weeks or certain amount of money. Withdrawal of savings was restricted in earlier days now lot more accessible. Still a few major institutions restrict withdrawal of savings to use the money as loan as well as cash collateral. Interest paid on savings may vary between 4 to 8.5% (Grameen Bank).
Loan policies: Loan amount widely vary among MFIs; normally starts with small size and increase in successive loans. Interest rates vary between 20 to 27% per annum expressed (computed as declining balance method). Loans are collected in weekly installments but in some cases in monthly and one installment. Although in earlier days clients were required to wait 1 to 6 months before receiving first loan but now a days due to competitive pressure first loan to a member may be disbursed within days of joining a group.
The rural cooperative movement in Comilla Sadar Upazila initiated by Akhtar Hamid Khan, which gained national and international fame in 1960s, was in response to income poverty and pauperization of farming community in that Upazila (formerly Kotawali Thana). Khan identified through numerous consultations with villagers and his observations of village economy that: a) farmers do not have access to adequate finance for agricultural production in time; b) natural disasters, mainly floods adversely affect production leading to poverty; c) agricultural productivity was very low due to low level of farming technologies available to the farmers at that time; d) low level of technical and management capacity of the farmers; and e) over dependence on agriculture. The solutions proposed was to form village level samabaya samity (cooperative societies) that would mobilize savings, capital from shares and lend to the farmers for agriculture. In addition, the societies would also invest in other businesses to make profits that would eventually be distributed to the members i.e. shareholders. In addition, village level societies were federated at the Thana level (second tier cooperative) that provided loans to the village cooperatives and other technical assistance such as management supervision, accounting and auditing services etc.
Several distinctive features of Comilla model were as follows: targeting the farmers, especially the small farmers; introduction of technologies (HYV seed, chemical fertilizers, irrigation and new farm practices); and loan was given to the farmers against land mortgage. One the main criticism in later days (in 1980s) against Comilla model was that it addressed needs of the farmers only and by design excluded the poor and the landless. However, later on, these cooperatives included the poor as well. The Comilla cooperatives are essentially finance and investment societies under the Cooperatives Act that offered savings and credit services to its savers and shareholders and invested in businesses such as brick-fields, processing plants etc. The village cooperatives offered short-term and long-term savings and mostly agricultural loans. Even cooperatives banks were established to provide ‘wholesale’ funds to the cooperatives.
In Comilla, farmers immensely benefited in 1960s but later after the Independence of Bangladesh many village cooperatives failed because of corruption, ‘elite capture’ of leaderships (the poorer members could not come to the leadership position and could not prevent corruption), failure of businesses under new generation of leaders and managers etc.
Replication leads to failure – IRDP to BRDB. The post-independence government attempted to replicate the Comilla approach under a project titled Integrated Rural Development Project (IRDP), which was later converted into a national agency called Bangladesh Rural Development Board (BRDB). Many reasons have been cited but the main reason was failure of government system to replicate a‘movement’ under the leadership of Akhter Hamid Khan. The relevant issue here is that the Comilla cooperative system also could not organize the poor for delivering financial services. BRDB later introduced many microcredit projects funded by bilateral and multi-lateral donors with some initial successes but on the whole the programs should be termed as unsustainable (Khandkar and Khalily 1996). In fact BRDB is not a relevant organization for rural finance any more.
Cooperative societies for business and personal savings/loans. But some traditional cooperative societies have been found to be successful within trading communities (in urban and rural markets), within staff members of various organizations, various professional groups such as vehicle workers and owners. They mobilize from their shareholders and provide short-term loans within the society members. Many successful cooperative societies are known for investing in trading, real estate, vehicles and consumer loans. These type of cooperative societies are found in every rural and urban markets owned and managed by shop-owners and act as their immediate source of short-term loans.
During 1960s Agricultural Development Bank (later became Bangladesh Krishi Bank) was the main source of loans for agricultural production in the form of fertilizer and other inputs loans, and loans for irrigation pumps, power tillers and cattle etc. As the name suggest loans were for famers who owned land. More importantly famers had to offer mortgage of land for loan. The high processing time due to cumbersome procedures, collateral requirement, and other institutional weaknesses often delayed disbursement and increased cost of finance to farmers. Besides, due limited number of branches during 1960s access to agricultural finance was limited to large farmers. Small farmers and landless by default did not have access to agricultural loan from BKB.
Bangladesh krishi Bank – BKB and Rajshahi Krishi Unnayan Bank- RAKUB are the principal institutional intervention for supporting agriculture and farmers. BKB and RAKUB mainly targeted and still target the small, medium and large farmers who could offer land as mortgage. The performance of these two specialized banks has always been poor in terms of disbursement, poor loan recovery, accumulated losses. They largely avoid the poor, and ‘both are deeply insolvent’ [Ferrari 2008].
After the independence the Nationalized Commercial Banks (NCBs) and BKB greatly expanded their branch networks in small towns and bazaars but their lending policies remained the same: they target the traders/businesses, ‘cottage industries’ and small/medium and large farmers who could offer collateral. Although there have been many projects for NCBs for providing agricultural loans to the farmers the banks normally failed due to many institutional weaknesses. But the expansion of branch did not help to bring the poor under financial services as they were not ‘bankable’ and could not offer collateral. The traditional view was that the poor and the landless did not have skills to manage money, business, and ability to repay loans.
A handful of non-government organizations have tried and are still trying the so called ‘self-help group’ approach of developing financial service delivery system. In this case, the promoter or the NGO organizes ‘self-help groups’ with the objective of facilitating savings mobilization for the poor women/men from among themselves. If the participating members need loan they can borrow from their samity i.e. from their own savings funds. If the funds are not adequate, the self-help samities may try to borrow from banks or the NGO supplies the additional capital. The second option has been tried in Bangladesh but the first option has been found not realistic. All management responsibilities of savings and credit are expected to be taken care of the leaders of the groups. But in real life often such educated leaders are not always available and in many cases NGO field officials perform this job. No reasonably large-scale financially viable operation is found that follows this approach. This type of community-based microfinance whilst popular in some countries has not been found to be successful in large-scale operation in Bangladesh. There have been some efforts from several NGOs (for example, Ashrai, Caritas, Concern Worldwide) and donor-funded projects to develop alternative systems but none could stand as a viable alternative. In general, this approach has failed to take off the ground to be considered as a serious alternative in Bangladesh. Self-help Groups (SHGs) or CBOs start with much enthusiasm but within a short period fail to continue due to many management problems. Some common problems are as follows: poor loan recovery rate after one to two years of operation when samity leaders/’managers’ fail to recover loans from members in many cases the influential members within the samity; inability to keep proper accounts by illiterate people; poor management skills of SHG leaders/managers; often leaders do not give adequate time to keep the system running;
misappropriation of funds by leaders and or influential individuals; maintaining funds in banks and dealing with banks; and inability to safe keeping cash balance in the village. The net result is that poor members lose their savings to those borrowed by did not repay and eventually the ‘self-help’ groups stops functioning. But the self-help approach could be a good alternative, if properly managed, in remote areas where MFIs do not offer services.